Negative Amortization

Full definition

In a standard personal loan, each monthly payment covers all interest due plus some principal, so the balance declines every month. With negative amortization, if the payment is set below the interest cost, the unpaid interest is added to the principal balance - the borrower owes more than they started with even after making payments. Where negative amortization appears: Standard personal loans: never. Personal loans are fully amortizing - each payment is calculated to pay off the loan by the maturity date. Negative amortization does not occur in standard personal loan products. Option-ARM mortgages - the classic example. Borrowers could choose a minimum payment that did not cover interest, causing balances to grow. Student loans in income-driven repayment - when the required income-based payment is less than the accruing interest, the balance grows (though federal law now caps this in some IDR plans). Credit cards - the minimum payment on a high-rate card often covers only a fraction of the interest, so balances grow if only the minimum is paid. Why it matters for personal loan borrowers: If a lender offers a 'temporary reduced payment' option (as part of a hardship program), check whether the interest that is not paid is being added to the principal. This is negative amortization in practice, even if not labeled as such. Always confirm the post-hardship payoff balance is the same or lower than before the program started. Deferred interest on 0% promotional products: '0% APR for 18 months' financing on purchases is not negative amortization, but deferred interest products (common in retail financing) charge all accrued interest retroactively if not paid in full by the end of the promotional period - a related but distinct risk.

• Amortization
• Forbearance
• Balloon Payment
• Deferment